IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities.  Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog article has been provided by David Nilssen, CEO and Co-founder of Guidant Financial (www.guidantfinancial.com).

Alternative Capital Resources on Most Personal Financial Statements (ROBS) Available for Business Acquisition

One of the greatest hurdles aspiring business owners face is securing adequate financing. The cash and eligibility requirements for obtaining a traditional small business loan can be a challenge for many borrowers to meet. That’s why many prospective business owners are turning to other forms of financing than traditional bank loans to make their dreams come true — and they’re succeeding! One of the alternative funding avenues that is growing in popularity is Rollovers for Business Start-ups (ROBS), also known as 401(k) business financing. ROBS funding allows entrepreneurs to use their retirement money for start-up funding, to acquire an existing business or to finance the purchase of a franchise — all in a fast, tax penalty-free transaction. 

Let’s take a closer look at the history and process that make ROBS funding possible.

The History and Legality of ROBS

Many entrepreneurs who aren’t too familiar with ROBS (and even those who are) have a lot of questions about the process — mainly regarding the legality of its structure. ROBS, also known as 401(k) business financing, has actually been an option since 1974 when Congress passed the Employee Retirement Income Security Act (ERISA), which shifted the responsibility of retirement savings from the employer to the employee. Critics of ROBS sometimes argue that retirement funds should be left in a retirement account. However, traditional brokerage accounts invest in public businesses, and, as you’ll see below, this structure is very similar. Instead of being placed in a volatile market, your retirement funds go to financing your own private business. Who better to bet your money on than yourself?

Qualifying for ROBS is Simple

Unlike traditional business loans, there are very few eligibility requirements for ROBS. Without credit, collateral, or down payment requirements, the funding process can move quickly, sometimes in as little as three weeks. The one essential requirement for ROBS funding is that you have at least $50,000 in an eligible retirement account, to ensure the tax benefits you receive from ROBS outweigh any associated fees. You technically can complete ROBS with less in your account, but it’s not recommended. It’s also important to note that while most retirement funds are considered “rollable,” Roth funds are not eligible for ROBS funding. 

How Does ROBS Work?

Step 1 – C-corporation
A new business is established as a C corporation, a type of business entity that is taxed separately from its owners or shareholders.  It’s also possible to convert an existing business, such as an S corporation (another type of entity where owners or shareholders are subject to tax on their shares), to a C corp. 

Step 2 – 401(k) Plan
The new corporation creates (or opens) a new 401(k) plan, which can purchase private stock.

Step 3 – Rollover
Funds from the existing retirement account are rolled into the new 401(k) plan.

Step 4 – Stock Purchase
The 401(k) plan purchases stock in the new C corp, resulting in a cash-rich entity.

Step 5 – Debt-free Business
The funds can now be used to fund the launch of a business, purchase a franchise, or as the down payment on an SBA loan. 

The Funding Advantages of ROBS

The ROBS arrangement is not a loan. You do have the opportunity to grow your retirement plan as you build up your business, but there are no required monthly payments and no interest charged. Many small business owners choose ROBS funding for this exact reason, but there are also a number of other factors to consider:

• The ability to build up your business. Without monthly payments to make, you can more quickly reinvest your revenue back into building your business. This is essential to surviving the first few years of business when cash is often tight.
• Fast funding. The entire ROBS process from start to funded can be completed in as little as three weeks. Fast funding can be the difference between closing the deal or not when purchasing a franchise or an existing business.
• Combining financing. If you don’t have enough money in your retirement account to fund the business of your dreams, you can still utilize ROBS. After the ROBS process is complete, you can immediately use the funds as the down payment on an SBA loan or another business loan — drastically increasing your overall buying power.
• Established 401(k) plan. The ROBS funding structure requires the establishment of a 401(k) plan, which then must be offered to employees. As a business owner this is a great recruiting tool, and as an employee yourself, it gives you the opportunity to continue to build your nest egg.

Want to learn even more about ROBS? Check out Guidant Financial’s Complete Guide to ROBS.

No matter where you’re at in your search for business funding, know that you have options. If you’re interested in starting your business debt-free, ROBS funding may be the right choice for you. Start your journey to business ownership by learning how much funding you can pre-qualify for today. 

David Nilssen is the CEO & Co-founder of Guidant Financial, a small business financing company that helps entrepreneurs identify, evaluate and deploy intelligent business funding strategies. Read more tips about finding and financing your business on the Guidant blog at guidantfinancial.com/blog.  Additional information on Guidant Financial and the contents of this article can also be obtained by contacting IBA’s Guidant Representative, Nita Ku, at (425) 326-4603 or nita.ku@guidantfinancial.com. 

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.